Bill Gross: Investors must adapt to survive

Bill Gross, dubbed the Bond King', is one of the few fixed-income managers to gain widespread public recognition. He co-founded California-based fixed-income specialist PIMCO in 1971 and helped it grow to $2trn in assets under management. Gross oversees the firm's flagship $260bn Total Return Fund, the word's largest bond fund. Since the global financial crisis, he has predicted that investors face a "new normal" of long-term slower growth and lower investment returns from America.

"Adaptation is tantamount to survival in the physical world," says Gross in his latest letter to clients. For example, the appalling casualties of World War I reflected the failure of generals to adapt old tactics to a new era of more lethal weaponery. Today, investors must adapt the approaches they have honed during the long bond bull market or see their investments put in great danger because of "antiquated portfolio management strategies".

During the past three decades, maturity risk the way in which a change in interest rates has a greater impact on the value of longer-dated bonds than shorter-dated ones worked in investors' favour. Interest rates fell over time, so buying bonds with steadily longer maturities to pick up higher yields was very successful.

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However, an environment of rising interest rates will cause long bonds to fall sharply in value, as happened in May. Since then, investors have pulled almost $19bn from PIMCO's funds, which may explain why Gross was keen to explain how one can still make money from bonds as rates rise.

New strategies will be needed, he says. Buying shorter maturity bonds the usual response to rising rates may be counterproductive while short-term yields remain so low. Instead, investors will need to focus more on other sources of risks and returns associated with bonds, such as credit quality, volatility and foreign currency exposure.